Regulatory Relations

A number of European Union countries remain outside eurozone supervisory arrangements, but most are under a treaty commitment to join the euro and the European Banking Union at some point. But a mix of politics and economics points to very divergent levels of progress among the outsiders. By Duncan Alford, associate dean and director of the Law Library & professor of law at the University of South Carolina

After the Great Recession and the subsequent euro currency crisis, the EU responded by proposing a banking union based on three pillars: a Single Supervisory Mechanism (SSM) within the European Central Bank (ECB), a Single Resolution Mechanism (SRM), and a common deposit insurance scheme. 

The SSM became operational in November 2014. The SRM was created with limited assets. The European Deposit Insurance Scheme has been discussed regularly but no agreement has yet been reached. The EU’s banking union continues a decades-long trend of more centralised regulation and supervision of banks operating in the European Union.

By treaty, all EU member states except Denmark must adopt the euro as their currency and thus also join the banking union. Thus far, 19 member states out of the current 27 have adopted the euro. In 2020, Bulgaria and Croatia joined the banking union as a step towards adopting the euro. Six member states are not members of the banking union – Czech Republic, Denmark, Hungary, Poland, Romania and Sweden.  

Legally, all (except Denmark) must join but no fixed deadline has been set. Will these six join the banking union and therefore make the SSM the supranational banking supervisor in all 27 EU member states and under what conditions?

After the euro crisis of 2010-12, the EU created a true supranational bank supervisor, the SSM within the ECB, based on the authority in TFEU Article 127(6): “The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the ECB, confer specific tasks upon the ECB concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.”

This provision first appeared in the Treaty of Maastricht (1992) but was not implemented until after the Great Recession and the euro currency crisis.

In 1999, 11 member states adopted the euro. Subsequently eight member states joined the eurozone – Greece (2001), Slovenia (2007), Malta and Cyprus (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015).

Eight EU member states are outside the eurozone and retain their own national currency: Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania and Sweden. According to their accession treaties, all except Denmark are legally obligated to adopt the euro as their currency and join the banking union upon meeting certain convergence criteria – price stability, government budgetary position, participation in the exchange rate mechanism of the European monetary system, and interest rate stability.

The United Kingdom withdrew from the EU in 2020 following a 2016 referendum on EU membership. Despite this treaty obligation, these eight member states have not yet joined the monetary union. The reasons for their delays vary.

Bulgaria & Croatia

Member states who have not adopted the euro as their currency may join the banking union by entering into a close co-operation agreement with the SSM. Effective October 1, 2020, Bulgaria and Croatia have entered into such a close co-operation agreement.  

Under the July 2020 close co-operation agreement between Bulgaria and the ECB, the ECB will supervise directly the five largest banks in Bulgaria; similarly, the ECB will supervise the largest eight banks in Croatia. Shortly after joining the SSM, Moody’s Investors Service increased its rating of Bulgaria’s unsecured and long-term debt from Baa2 to Baa1, noting that its progress to euro area accession and the resulting strengthening of its institutional capacity were the primary drivers for the rating increase. At the same time, Moody’s upgraded Croatia’s rating to Baa1 from Baa2 citing its improved economic and monetary policymaking and enhanced institutional capacity.  


By treaty Denmark is not required to adopt the euro as its currency or to join the banking union. Denmark pegs its currency, the krone, to the euro. This fixed exchange rate policy is widely supported in Denmark and results in de facto membership on the eurozone. However, the Danish government has investigated whether to join the banking union on several occasions. In October 2019, Danske Nationalbank, the Danish central bank, indicated its support for Denmark joining the banking union because membership would make the ECB’s supervisory expertise accessible and match the increasing expertise and sophistication of Danish banks. Most recently, a separate government inquiry in December 2019 laid out the pros and cons of joining the banking union. This balanced report leans toward Denmark joining the banking union.   

Upon joining the banking union, the SSM would be the principal supervisor of three large Danish banks. Insolvency or failure of any of these banks may well exceed the ability of Denmark to resolve the bank on its own because the cost of a failure could exceed 8% of Denmark’s GDP, the maximum percentage most countries can finance alone without severe economic disruption.  

Danish membership in the banking union also has tradeoffs. While membership would provide access to the SRM financial backstop in the event of a bank failure and access to the sophisticated supervisory expertise of the ECB, Denmark would lose regulatory and supervisory independence as the ECB would supervise Denmark’s largest banks. The Danish government has indicated that they would call for a voter referendum on joining the banking union.


Under its Accession Treaty, Sweden must eventually join the eurozone and therefore also the banking union. A government inquiry into membership in the banking union released in December 2019 analysed the benefits and costs of Sweden joining the banking union.  

The benefits include the insight the ECB has into eurozone financial risks given the breadth of its supervision and information gathering within the banking union. Because the ECB supervises the 116 largest banks in the eurozone and has access to detailed financial information on these banks, it can benchmark a bank’s performance against a larger data set than the typical national bank supervisory authority. The Riksbank, Sweden’s central bank, and the Finansinspektionen, Sweden’s bank supervisory authority, may want to join the banking union simply because of the extensive cross-border operations of Swedish banks.  

The costs of Sweden joining the banking union include: the greater financial commitment from banks in Sweden such as additional supervisory fees paid to the ECB and fees paid to the European Resolution Fund, the loss of regulatory and supervisory independence of Sweden’s national supervisory authorities, and the significant economic and political risks Sweden may face in the event of a crisis situation. The December 2019 Swedish government inquiry emphasised that joining the banking union or adopting the euro are political decisions.

Czech Republic

The government of the Czech Republic has considered whether it should join the eurozone and adopt the euro as its currency several times since the early 2000s. In January 2021, the Czech government in its latest report again considered joining the eurozone and the banking union.  It decided not to join the banking union because the union is not yet complete. The banking union lacks common deposit insurance and there is relatively little practical experience operating within the banking union without also adopting the euro. The report concluded that joining the banking union and adopting the euro as its currency should occur at the same time. According to a July 2021 Eurobarometer survey, there is little support among the Czech population to adopt the euro. Only 36% believe that adoption of the euro will have positive consequences for the Czech Republic. The government will reevaluate its position in three years. 


Poland is unlikely to join the banking union or the eurozone in the near future. The current populist political climate makes it difficult to explain to the public the pros and cons of adopting the euro as its currency. Only 51% of the Polish population believe that the adoption of the euro will have positive consequences for Poland according to a recent Eurobarometer survey. Inflation is higher in Poland than the eurozone members and they are beginning to monetise the public debt they have incurred in combatting the Covid-19 pandemic. According to the 2020 convergence report prepared by the ECB, Poland does not meet all the Maastricht convergence criteria. Adoption of the euro by Poland is likely to occur when the public tires of a higher inflation rate relative to its European neighbours.

The ruling Law and Justice party stated in 2017 that Poland would not join the eurozone for 10-20 years because it would lose its independent monetary policy. Joining the eurozone is unlikely under the current conservative ruling coalition.


Romania is committed to joining the eurozone. The National Bank of Romania, its central bank, has examined the possibility of joining the eurozone several times since 2007. In 2019, the Romanian government with support of the central bank set 2024 as a target date for joining the banking union. According to the July 2021 Eurobarometer survey, 64% of Romanians believe adopting the euro is positive for Romania – the highest positive rating among the seven non-eurozone nations surveyed.

The National Bank of Romania supports this date but wants Romania’s GDP per capita to be roughly two-thirds of the eurozone average prior to joining. However, Romania’s excessive budget deficit and additional spending related to the Covid-19 pandemic will likely push this target date further out.


In 2016, half of the banking assets in Hungary were held by local banks while the remainder were controlled by foreign banks, principally banks located in the eurozone. Foreign banks want central and eastern European countries to join the banking union in order to reduce their compliance burden. The current populist, conservative government of Victor Orban is unlikely to pursue joining the banking union or adopting the euro as its currency given the resulting loss of supervisory and monetary independence. Furthermore, according to the 2020 convergence report by the ECB, Hungary does not currently comply with all the Maastricht convergence criteria. The extraordinary policy measures taken to offset the economic damage from the pandemic will make compliance even more difficult.

Reasons for delay?

What could delay the inevitability of all EU Member States joining the banking union?

As noted earlier, all EU member states, except Denmark, are obligated by treaty to adopt the euro as their currency and as a result join the banking union. The eurozone began with 11 member states and now has 19 members. Eight member states remain outside the eurozone – some because they choose not to join; others because they do not yet meet the Maastricht convergence criteria. Six member states remain outside the banking union.

Several member states, including Poland, Hungary, and the Czech Republic, have delayed pursuing membership in the eurozone. This “foot dragging” may continue. Member states may intentionally not make stringent efforts to meet the Maastricht convergence criteria. Without complying with the convergence criteria, a member state is not eligible to join the eurozone. The debt member states issued to counteract the severe recession caused by the pandemic will make attaining the convergence criteria, particularly the government budgetary position, that more difficult.

In recent years, the ECB prefers member states outside the eurozone to join the banking union first through a close co-operation agreement before adopting the euro as its currency. Prior to joining the banking union, the member state must undergo an asset quality review and stress testing exercise of its major banks. Some member states such as the Czech Republic prefer to join the banking union at the same time as joining the eurozone. This new preliminary requirement – joining the banking union – prior to joining the eurozone is unattractive to some member states.

Some member states for political reasons enjoy the independence they have in making supervisory, resolution and deposit payout decisions with respect to their banking sector. European nations heavily rely on the banking sector for finance and maintaining this independence is attractive. In addition, the rise of populism and nationalist politics in Hungary and Poland makes discourse on the benefits of adopting the euro or joining the banking union difficult.

The incompleteness of the banking union is unattractive to non-eurozone member states. The SRM is operational but incomplete. The assets available under the SRM are insufficient to handle a major systemic financial crisis despite recent improvements. In June 2021, the assets held by the European Resolution Fund amounted to approximately €50bn, rising to €70bn with an additional backstop of €50bn by the end of 2023. Some eurozone members have ignored the SRM in resolving banks, such as Germany’s handling of NordLB and Italy’s handling of Veneto Bank.  

The agreement among all member states on the issuance of NextGenerationEU bonds in the amount of €800bn in response to the pandemic has created a common financial asset that will encourage the further development of the banking union. These bonds are denominated in euros and backed by the credit of all the eurozone member states. They will boost the role of the euro as a safe asset, tradeable on capital markets, and an alternative to US Treasury bonds. 

The missing link

However, the banking union will not be completely developed until there is a eurozone-wide common deposit insurance scheme. The economic crisis caused by the pandemic has increased the amount of non-performing loans of European banks and thus put off the creation of a true common deposit insurance scheme. The northern European member states, led by Germany, have resisted creating a common insurance scheme until the banks in the southern European member states lower their ratio of non-performing loans.


Bulgaria and Croatia are on a path to adopt the euro and have already joined the banking union. Romania and Denmark are the next most likely member states to adopt the euro and join the banking union. Denmark pegs its currency to the euro and its banks already have extensive operations in the eurozone. Denmark’s decision will influence Sweden’s decision to join the eurozone. If Denmark joins, Sweden and Norway will be the only Nordic nations outside the banking union.

Norway is not a member of the EU. Nordic nations have a long history of bank supervisory cooperation and Sweden will find it difficult to remain the sole Nordic EU member outside the eurozone and the banking union. Romania is inclined to adopt the euro but has significant work ahead to meet the Maastricht convergence criteria.

The Czech Republic, Hungary and Poland are less likely to join the eurozone soon because they value their economic and monetary independence and the current political climate in each country disfavours losing this independence to the EU.

Likelihood of non-eurozone member states joining the banking union

Non-eurozone member state Likelihood Reasons / analysis
Czech Republic Within 10 years The Czech government wishes to adopt the euro and join the banking union at the same time. They are evaluating their position every few years.
Denmark Within 5-10 years

Exemption in Maastricht Treaty

Currency pegged to euro

Nordic supervisory cooperation

Its decision will be influenced by Sweden’s decision.

Hungary Over 10+ years The current populist government values its regulatory and monetary independence.
Poland Over 10+ years The current populist government values its regulatory and monetary independence.
Romania Within 5-10 years Romania is generally favourable to joining the euro but does not yet meet all the Maastricht convergence criteria.
Sweden Within 5-10 years

Nordic supervisory co-operation

Its decision will be influenced by Denmark’s decision.